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The Race to Record a Mortgage is One You Do Not Want to Lose

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  • Posted on: Dec 20 2019

Recording a mortgage puts the world on notice of the mortgagee’s interest in the real property that is the subject of the mortgage.  “New York has a ‘race-notice’ [mortgage] recording statutory scheme whereby the mortgage recorded first by a mortgagee without notice of any other mortgages will maintain priority over such other mortgages.”  Alliance Funding Co. v. Taboada, 39 A.D.3d 784 (2nd Dept. 2007).  Section 291 of New York’s Real Property Actions and Proceedings law, which governs the recording of conveyances in real property, provides:

A conveyance of real property, within the state, on being duly acknowledged … may be recorded in the office of the clerk of the county where such real property is situated, and such county clerk shall, upon the request of any party, on tender of the lawful fees therefor, record the same in his said office. Every such conveyance not so recorded is void as against any person who subsequently purchases or acquires by exchange or contracts to purchase or acquire by exchange, the same real property or any portion thereof, or acquires by assignment the rent to accrue therefrom as provided in section two hundred ninety-four-a of the real property law, in good faith and for a valuable consideration, from the same vendor or assignor, his distributees or devisees, and whose conveyance, contract or assignment is first duly recorded, and is void as against the lien upon the same real property or any portion thereof arising from payments made upon the execution of or pursuant to the terms of a contract with the same vendor, his distributees or devisees, if such contract is made in good faith and is first duly recorded. Notwithstanding the foregoing, any increase in the principal balance of a mortgage lien by virtue of the addition thereto of unpaid interest in accordance with the terms of the mortgage shall retain the priority of the original mortgage lien as so increased provided that any such mortgage instrument sets forth its terms of repayment.

The preferred status of a good faith purchaser for value “cannot be maintained by a purchaser with either notice or knowledge of a prior interest or equity in the property, or one with knowledge of facts that would lead a reasonably prudent purchaser to make inquiries concerning such.”  Chen v. Geranium Development Corp., 243 A.D.2d 708, 709 (2nd Dep’t 1997) (citations omitted).  In Chen, plaintiff contracted with the owner to purchase real property.  Plaintiff’s deposit was returned and the contract was cancelled after a dispute arose between the parties.  Thereafter, plaintiff, Chen, commenced an action to foreclose its contract-vendee’s lien in which the court entered a judgment of foreclosure and sale (the “Judgment”) directing the sale of the subject property.  The property was purchased by Fandy Corp., who moved to intervene in the action to vacate the Judgment that permitted the sale of the property now owned by it.  Fandy’s deeds were recorded prior to any recorded interest by Chen.  In denying Fandy the relief it sought, the Court found that Fandy had “actual knowledge of the prior contracts” that Chen entered into with the owner of the property but Fandy “merely accepted, without any proof or inquiry, independent or otherwise, a bare representation prior to their closing that the contracts had been cancelled.”  Chen, 243 A.D.2d at 709.  Thus, the court found that Fandy was not a good faith purchaser for value and its recording of its deed did not prime Chen’s interest in the property.

In Emigrant Bank v. Drimmer, 171 A.D.3d 1132 (2nd Dep’t 2019), the Court also determined whether a party was a good faith purchaser.  In 1999, Drimmer purchased property and obtained a mortgage from lender, which, for some reason, was not recorded until 2006.  However, in 2002 Drimmer sold the property to Sternberg, whose title report did not reveal lender’s yet unrecorded mortgage.  Following the sale to Sternberg, Drimmer continued to make monthly mortgage payments to lender, which included real estate tax escrows.  In 2007, lender learned of Drimmer’s sale to Sternberg and, as a result, accelerated the debt and stopped accepting Drimmer’s monthly payments.  Lender commenced action to “impose its mortgage on the premises, to foreclose the mortgage, and for a judgment declaring that its mortgage is a valid lien against the premises.”  The motion court granted Sternberg’s motion for summary judgment; finding that he was a “good faith purchaser for value … and took the [subject] property free of the subject mortgage.”

The Second Department reversed.  The Emigrant Court explained what is necessary to be deemed a good faith purchaser as follows:

The status of good faith purchaser for value cannot be maintained by a purchaser with either notice or knowledge of a prior interest or equity in the property, or one with knowledge of facts that would lead a reasonably prudent purchaser to make inquiries concerning such  The intended purchaser must be presumed to have investigated the title, and to have examined every deed or instrument properly recorded, and to have known every fact disclosed or to which an inquiry suggested by the record would have led.  If the purchaser fails to use due diligence in examining the title, he or she is chargeable, as a matter of law, with notice of the facts which a proper inquiry would have disclosed”

Emigrant, 171 A.D.3d at 1134 (citations and internal quotation marks omitted).  The Court found that Sternberg established his prima facie entitlement to judgment by submitting evidence that he purchased the property “for valuable consideration, without prior notice of [the lender’s] mortgage, and without knowledge of facts that would lead a reasonably prudent purchaser to make such an inquiry, and that he recorded his deed prior to the recording of [lender’s] mortgage.”  Emigrant, 171 A.D.3d at 1134 (citations omitted).  Nonetheless, the Court found triable issues of fact precluding summary judgment based on evidence that lender paid real estate taxes on the property before and after Sternberg’s purchase, which might have provided Sternberg with “actual knowledge of the [lender’s] mortgage prior to his purchase and whether due diligence in examining the tax records for the property would have placed him on inquiry notice of the [lender’s] mortgage prior to his purchase.”  Emigrant, 171 A.D.3d at 1134 (citations omitted).

Related issues were recently addressed in Bank of America v. Giwa (Sup. Ct. New York Co. December 13, 2019).  The defendant in Giwa was one of the first individuals to purchase a new unit in a recently converted condominium.  Prior to the conversion, the entire building had a single tax lot designation.  “However, because a condominium is real property, each unit gets its own block and lot designation when the new condos are created. In the condominium declaration, the individual units were assigned individual lots and defendant’s condominium was designated Block 2041 Lot 1307.”  At the time defendant purchased his unit, he obtained a mortgage from lender and, thereafter, obtained a loan modification from lender increasing the principal balance of the loan.  The original mortgage and the documents relating to the subsequent loan modification were mistakenly recorded against the prior lot number relating to the entire building before conversion, instead of the lot number related to defendant’s individual, post-conversion, unit.

Giwa defaulted on the loan and lender commenced foreclosure proceedings.  The record was clear that lender realized its mistake but took no steps to correct them with the County Clerk; as it would have been permitted to do under New York County Law § 919(j).  In the meantime, Giwa failed to pay his condominium charges and his unit was sold at a Sheriff’s sale (the “Sale”) to pay the judgment.  The purchaser at the Sale (the “Purchaser”) recorded the deed against the correct parcel.

The Giwa Court found that Purchaser was a “bona fide purchaser for value and it takes title to the property free and clear of lender’s mortgage because of improper recording.”  The Court was not moved by lender’s argument that at the time the mortgage was executed “the new condo lots had been designated but had not yet been formed by the city.”  Lender was not “absolved” of its “responsibility to ensure its mortgage was recorded against the correct lot in the intervening time since the mortgage was executed.”  The Court found that lender had numerous opportunities, but failed, to correct its mistake over a rather long period of time.  Thus, the Court found that “[t]he simple fact is that plaintiff had many chances to correct its mistake in the past twelve years but did nothing to put anyone on notice that it claimed an interest in this condominium unit.  Had plaintiff taken any action, this situation could have been avoided.”  The Court determined that Purchaser was entitled to rely on its title search, which failed to disclose the existence of lender’s mortgage recorded improperly on the wrong unit.  The Court also found that Purchaser was not “on inquiry notice that there was a possible mortgage recorded on the property because the deed was not recorded on [the proper] tax lot.”

In denying lender’s motion for summary judgment and granting Purchaser’s motion for summary judgment, the Court expressed its concerns with lender’s position and stated:

An extremely cautious purchaser might have considered looking at the Base Lot. But that type of purchaser might also do searches on the neighbors’ condo units or on the surrounding buildings. The fact is that [lender] attempts to blame [Purchaser] for not discovering [lender’s] mistake. Apparently, [lender] did not realize this mistake for nearly a decade. and yet it claims [Purchaser] should have somehow realized it.  (Emphasis in original.)

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